By Antoine de Saint-Exupéry
For many, the subject of financial planning is something that is either dreaded or even avoided. However, planning for and managing your golden years can in fact be a liberating exercise. After all, who wants to live their retirement years in uncertainty? The new reality is that employees, professionals and business owners are left to fend for themselves; the age of guaranteed pensions is now a distant memory for most of us. Worse still, the providers of financial services that should be there to fill the void are often viewed with a high degree of scepticism which is warranted in many cases.
In this first installment of a five part series, we will help you makes sense of it all. Whether you an entrepreneur who is selling your business, a professional looking to transition to passive investment income or a retiree who would like to improve their financial outlook, we will help you get started.
Understanding the difference between a wish and a plan
Have you ever heard the expression failing to plan is a plan for sure failure? Successful sports team, philharmonic orchestras and musicians all plan their performances ahead of time. However, many simply do not plan their retirement. Perhaps it is because they feel they do not have enough money, that retirement is a long ways away or simply it is “one of those things” that never seem to make it to the top of the list.
An extensive survey conducted by the governing body of Canadian financial planners known as the Financial Planning Standards Council found that 85% of the respondents who had completed a comprehensive financial plan reported higher levels of financial contentment over those who have engaged in limited planning. Conversely, only 44% of respondents who had not gone through a comprehensive financial plan felt they were on track with the financial affairs. You can read the complete findings here:
Like a good book or a picture perfect game plan, one needs to start from the end first. Leaving aside some of the financial issues for a minute; what do you want to do with your golden years?
It is important to note that retirement is usually comprised of three stages: active retirement is when most accomplish their “bucket” list, the family stage where spending time with friends and family take priority and finally the health stage where energy levels lead to a more sedentary lifestyle. Notice I left out timelines as everyone’s health, social network, energy and finances will have an impact on these three stages.
Inventory your sources of income:
Once you have established what you want from retirement, it is time to take inventory of your sources to fund your retirement. For some, the active part of retirement means the spending level will actually increase in the early phase of retirement.
In retirement, after tax cash flow is the most important component. While the financial industry’s main narrative is about the value of your retirement nest egg, successful retirees know that a steady cash flow with an ability to grow along with inflation is in fact the pot of gold.
The sources of retirement funds can be numerous. For some, it can mean a defined benefit plan from your employer. Don’t overlook Old Age Security and the Canadian Pension Plan benefits. In addition to these defined benefit income sources, you might want to add permanent insurance policies (yes they can be a source of retirement income), annuities and your workplace defined contribution pension plan commonly known as a group RRSP. Finally there are staples; Registered Retirement Savings Plans-RRSP (later converted to Registered Retirement Income Funds-RRIF at age 71 or sooner) and Tax-Free Savings Accounts-TFSA.
For many, you can also add real estate investments and investment portfolios. The key here is to focus on investment portfolios that are generating income for you. That Florida condo or your cottage do appear on your balance sheet, but in retirement, they are costing you money rather than earning money for you. They might be appreciating, but you can’t take the appreciation and pay your property tax bill…cash is king in retirement!
Making time work for you:
Finally, the last concept to understand is the idea that time can either work for you or against you. In our line of work we see many would be retirees who sit on the sidelines with their retirement nest egg, which often is quite substantial, in order to “time” the entry and deploy into investments. In short, it is a fool’s game; time is working against you as your entry point must make up for lost income and capital gain opportunities.
We can show you ways to deploy capital into the market efficiently in order generate the cash flow you require. Remember that the market WILL correct 15%, 20% or 25 % in the future. However, what is unclear is if it will do so from current levels, or five years from now and from levels that may be 25% higher than today’s current prices.
The best way to insulate yourself is to ensure that your cash flow from your sources of retirement income meet or exceed your need for income. If you can manage this very simple feat, you have effectively insulated yourself from the vagaries of the markets.
Benoit Poliquin, CFP, CFA
President & Lead Portfolio Manager
18 Years of industry experience